ACQUISITION OF SHARES THROUGH BUYBACK PRESENTED BY : PROF(DR. PARTHIBAN RAJAN)
Nov 14, 2014
ACQUISITION OF SHARES
THROUGH BUYBACK
PRESENTED BY: PROF(DR. PARTHIBAN RAJAN)
AGENDA
CASE STUDY – HUL LTD
IMPROVEMENT IN THE FINANCIAL RATIOS
EFFECTS OF BUYBACK OF SHARES COMPANY SHAREHOLDERS
SEBI REGULATIONS, 1998
PROVISIONS UNDER THE COMPANIES ACT, 1956
OBJECTIVES OF BUYBACK
MEANING
Cancellation of share capital
Buyback is reverse of
issue of shares
Reduction in share capital
WHAT IS BUY BACK?
Unused Cash
Tax Gains
Market perception
Exit option
Increase promoter's stake
Show Rosier financials
OBJECTIVES OF BUYBACK
• BALANCE SHEET OF A COMPANY BEFORE BUYBACK:
EXAMPLE
Liabilities Amt. Assets Amt.Equity 1,00,000 Fixed Assets 6,00,000Reserves 1,00,000 Current Assets 3,00,000Long term debt 2,00,000 Cash 1,00,000Bank Loan 2,00,000Current Liabilities
4,00,000
TOTAL 10,00,000 TOTAL 10,00,000
Net Profit after tax (NPAT)= Rs. 10,00,000If the company buys back 50,000 shares through cash, cash as well as the outstanding equity will decrease by Rs. 50,000.
CHANGES IN KEY RATIOSBefore Buyback
• ROE= Net Profit After tax Shareholder’s equity
= 10,00,000 = 10 1,00,000
• ROA= Net Profit After tax Total Assets = 10,00,000 = 1
10,00,000
• EPS= NPAT- Preference dividend No. of equity shares = 10,00,000 = 10 1,00,000
After Buyback
• ROE= 10,00,000 = 20 50,000
• ROA= 10,00,000 = 1.05 9,50,000
• EPS = 10,00,000 = 20 50,000
Section 77A, 77AA and 77B of the
Companies Act,1956. These were inserted by the Companies (Amendment)
Act,1999.
The Securities and Exchange Board of India (SEBI) framed the SEBI(Buy Back
of Securities) Regulations,
1999
The Department of Company Affairs
framed the Private Limited Company and
Unlisted Public company (Buy Back
of Securities) rules,1999 pursuant to Section 77A(2)(f) and (g) respectively.
THE PROVISIONS REGULATING BUYBACK OF SHARES
PROVISIONS UNDER COMPANIES ACT, 1956
BUYBACK METHODS
Free Reserves
Securities Premium Account
Proceeds of any shares or
other Specified securities
SOURCES OF BUY-BACK SEC 77A (I)
a• The buy-back is authorized by the articles.
b• Special resolution
c• The buy back is less than 25% of total paid up equity capital and free
reserves.
d• Maintaining debt equity ratio: 2:1
e• All the shares or other specified securities for buy-back are fully paid-
up.
f• For listed shares as per guidelines issued by SEBI.
CONDITIONS FOR BUYBACK SEC 77A(2)
Full & complete disclosure of all material facts
Necessity for buy-back
Class of security of buy-back
Amount to be invested
Time limit for completion of buy-back
NOTICE OF THE MEETING SEC 77A(3)
Every Buy Back should be completed within 12
Months from the date of
passing of the special
resolution
BUY BACK PERIOD SEC 77 A(4)
MODES OF BUYBACK SEC 77A(5)
Declaration of solvency to be filed with the:
Registrar of company
SEBI (for listed co’s.
only)
DECLARATION OF SOLVENCY SEC 77A(6)
The company shall extinguish and
physically destroy the securities so
bought back within 7 days of
completion of buy-back. Since holding
Treasury stock is not allowed in
India by Buyback of shares.
DESTRUCTION OF THE SECURITIES SEC 77A(7)
On completion of buy-back of shares / securities, the company shall not make further issue of the same kind of shares /
securities within a period of 24 months except:
a. Bonus shares; or
b. Conversion of warrants,
or
c. Stock option
schemes or sweat
equity, or
d. Conversion
of preference shares or
debentures into equity
shares
FURTHER ISSUE OF SHARES SEC 77A(8)
Securities so bought,
Consideration paid
Dates of cancellation, extinguishing & physically destroying of the securities
Other particulars as prescribed
MAINTENANCE OF REGISTER SEC 77A(9)
Within 30 days of completion of Buyback
FILING A COMPLETION RETURN SEC 77A(10)
a. Imprisonment upto 2 years;
or
c. Both
PENALTIES SEC 77A(11)
When a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve account referred to in clause (d) of the provision to
sub-section (1) of section 80 and details of such transfer shall be disclosed in the balance sheet.
TRANSFER TO CAPTIAL REDEMPTION RESERVE ACCOUNT SEC- 77AA
No company shall buy its own shares or specified securities
• a) Through any subsidiary company including its own subsidiary company.• b) Through any investment companies or group of investment companies.
No company shall directly or indirectly purchase its own shares or other specified securities in case such company has not complied with the provisions of sections 159, 207 and 211.
PROHIBITION OF BUY BACK UNDER CERTAIN CIRCUMSTANCES SEC 77B
Special resolution
Buyback should not exceed 25% of the total paid-up capital and free reserves.
Declaration of Solvency
The shares bought back should be extinguished and physically destroyed.
No further issue of similar securities within 2 years, except bonus, conversion of warrants, etc.
SEBI REGULATIONS, 1998
Public announcement in,• One National English Daily• One Hindi National Daily• One Regional Language Daily
Public announcement should specify Record Date
Buyback is not allowed through negotiated deals or spot transactions or private arrangements.
There is a freedom to fix the price of shares or other specified securities for buyback.
Promoters can sell their shares through tender offer & also through purchase offer of odd lots.
Merchant bankers will have to be appointed
A copy of the Board resolution authorising the buy back shall be filed with the SEBI and stock exchanges.
Consideration will be paid in cash
Special resolution has to be filed with SEBI & stock exchanges within 7 days from date of passing the
resolution.
Once the offer is filed with SEBI or Public announcement is made, Buyback cannot be withdrawn.
No public announcement is permitted during the scheme of amalgamation, compromise or arrangement.
Appointment of Compliance officer & investor service center.
Locked-in or non-transferable shares are not allowed.
Destroying the share certificates in presence of merchant banker & auditors within 15days.
Buyback through the public offer or tender offer shall open an Escrow Account.
Advertisement within 2 days of Completion Buyback.
• This can be broadly divided into two parts:
a) Effects on the Company:SHAREHOLDING PATTERN CHANGESCompany: A Ltd • Total no of shares 150• Face Value 10• Equity Capital 1500 • Buyback of equity shares 25 • Max offer price 15
Particulars Pre buy back Post buy back
Promoters 50 50
Non promoters 100 75
Particulars Pre buy back Post buy back
Promoters 33.33 40
Non promoters 66.67 60
SHAREHOLDING PATTERN IN % TERM
EFFECTS OF BUYBACK OF SHARES
Particulars Pre buy back Post buy back
CashAssetsEarnings Outstanding sharesEquity sharesReservesShareholders equityMP
10001000015001501500200170010
62596251500125125075132515
FINANCIAL RATIO ROAROEEPSP/E ratio
0.150.88101
0.161.13121.25
IMPROVEMENT IN THE FINANCIAL RATIOS
Tax Benefits
Higher Proportion of shares
Higher Share Price
Reduction in
investors
interest
EFFECTS OF BUYBACK ON SHAREHOLDERS
• Net assets available to Equity ShareholdersNumber of outstanding Equity Shares
Asset backing
value
•PECV is given by discounted value of profit available to the equity shareholders.
Profit Earning capacity value
•It is valued at the prevailing market price of that script.
Market value
PRICING BUYBACK
VALUATION OF BUYBACK OF SHARES
Average Closing Price
Inviting Shareholders to sell the share
Debt-equity ratio
Track record
Look at ROCE/RONW
Take note of Irrationality
Take a long-term perspective
Dispose off volatile shares
Selling off for profit
WHAT SHOULD YOU LOOK AT BEFORE PARTICIPATING IN BUYBACKS?
BUYING DECISIONS
EPS
Book Value
Promoter Stake
SEBI PULLS PLUG ON “HOLLOW BUYBACKS”
Buy back of shares
CASE STUDY
ABOUT THE COMPANY
1. Beginning2. Corporate History3. Listing4. Parentage5. Turnover6. Employment
Era of FMCGSunlight Soap -1888Lifebuoy – 1895LuxVim….
Hindustan Vanaspati Manufacturing Company -1931Lever Brothers India Limited -1933United Traders Limited -1935 Hindustan Lever Limited -1956Hindustan Unilever Limited -2007
Listed on Kolkata, Madras & Bombay – 195610% equity - Indian Shareholders
Part of €40 billion Unilever Group
Rs.17,523 Cr Audited results for April 1, 2009 to March 3, 2010
>15000 direct employees
SHAREHOLDING OF HUL
• Offered price : Rs 280/share
• Maximum buyback of Shares: 2.25 crore
• Maximum Amount : 630 crore(25% of equity share capital)
• Equity and reserves : 218+2450cr
• Cash and bank balance : Rs 1,976.79cr
• Buyback from BSE & NSE through open market purchase
BUYBACK OFFER
• Effective utilization of surplus cash• Smaller equity base
REASONS FOR BUYBACK
EPS MPSMPS
MOVEMENT IN HUL SHARE PRICE
Balance Sheet of HUL Ltd. As on 31-3-2010 (Rupees in crs)
Particulars 31-3-2010 31-3-2011(E)(A) Sources of Funds 1.Shareholder`s Fund Capital 218.17 174.536Reserves & Surplus 2,365.35 1,864.394
2,583.52 2,038.932.Loan Funds
(a)Secured Loan
(b)Unsecured LoanTOTAL OF (A) 2,583.52 2,038.93 (B) Applications of Funds Net block 2,162.11 2,247.52capital work-in progress 273.96 273.96Investment 1,264.08 1,264.08Deferred Tax 248.82 248.82 Current Assets, Loans and AdvancesInventories 2,179.93 2,179.93Sundry debtors 678.44 678.44Cash and bank balances 1,892.21 1,262.21Other current assets 16.62 16.62Loans and advances 600.56 600.56 5,367.76 4,737.76
Current Liabilities and Provision -6,733.21 -6,733.21Net Current Assets -1,365.45 -1,995.45TOTAL OF (B) 2,583.52 2,038.93
DATA 2010 (Rs. in Crs)
2011 (E) (Rs. in Crs)
PATMarket price of share
No. of sharesTotal assets/ Net Worth
2,202.03239
218.172,583.52
2,202.03280
174.542038.93
Assuming PAT to remain same in the year 2010-11
Particulars 2010 2011(E)
Return on assets 0.85 1.08
Return on equity 0.85 1.08
Earning per share 10.09 12.62
Price earning ratio 23.68 22.18
Key Financial Ratio (31st March)
• Current Price: Rs.314/share - Implications
PRESENT SCENARIO
Date BSE NSE
31 Aug 2010 42921 57079
23 Aug 2010 50060 49940
Total 92981 107019
Buyback taken place
2,00,000
Thank you
09:49:32 AM